Black Monday

• First contemporary global financial crisis
• Global stock markets plunged in a matter of hours
• Chain Reaction hit global markets
• Demonstration of how "globalized" the world has become
• DJIA dropped 22.6% in a single session (largest in history)
• Marked the start of a longer down-turn in the United States
• Was a true panic - traders ran to the pits to sell
• Was limited to stock markets
• Did not result in an economic recession
• Did not spread into a banking crisis
• Potentially thanks to Fed Intervention
• 57% of losses were regained in 2 trading sessions
• Markets hit new highs within 2 years

Federal Reserve Response to Black Monday

• The Fed Affirmed it's readiness as a source of liquidity to support the economic & financial system
• The Fed encouraged banks to continue lending (otherwise the crash could have spread to the broader economy)

Reforms Based off Black Monday Crash

• Exchanges implemented rules to temporarily pause trading after rapid sell-offs (circuit breakers)
• Federal Reserve's use of liquidity to help the crisis set a precedent for future crisis
• Started new era of confidence that Fed can stop market downturns
• Some consider this to be a negative - has set up  a manipulated market (if people think the fed will save it)

Black Monday History

• Stock markets were up in the first half of 1987
• Concerns of bubble by late August (DJIA up 44% in 7 months)
• Mid October market volatility from news reports (larger trade deficit)
• Markets Began to sell off
• October 16th Triple Witching (DJIA down 4.6%)
• Monday October 19th
• Asian stock markets started selling in the AM
• NZ Markets dropped 60%
• DJIA fell 22.6%

Potential Black Monday Causes

• Inflow of international investors to US markets (causing rapid rise and thus rapid fall)
• Use of "Portfolio Insurance" - accelerated crash pace
• Mismatched timelines for settlement of different trade types may have forced additional selling
• Federal Reserve Increasing Interest Rates:
• The Fed started to tighten in February 1987, sending rates up
• The Fed continued to tighten until Black Monday (markets crashed)